Overview

The UNIDROIT Guide to International Master Franchise Arrangements, the first instrument prepared by UNIDROIT on franchising, was first published in September 1998, a second edition in English following in 2007.

Work within UNIDROIT on franchising goes back to a proposal made by the Canadian member of the Governing Council of UNIDROIT in 1985. In those years, UNIDROIT was engaged in the preparation of what were to become the UNIDROIT Conventions on International Financial Leasing and International Factoring,1 and the Council member saw the preparation of uniform rules on franchising as a natural development in the process of the preparation of uniform rules for the new types of agreement that were emerging at the time. There had furthermore been a number of instances of sharp practices within Canada that it was feared might spread to other countries with the international expansion of franchising, which in those years had taken on momentum.

For a number of years work was limited to a supervision of the developments that took place at both national and international level, especially within the European Union which was engaged in the preparation of the Franchising Block Exemption that was subsequently adopted.2

In 1993 the Governing Council decided that the time had come for work to start and authorised the setting up of a Study Group on franchising. The Study Group had as its task the examining of the necessity and feasibility of the adoption of an international instrument and to this purpose it examined both international and domestic franchising.

The findings of the Group led to the conclusion that international franchising did not lend itself to being dealt with by means of an international convention. This was clearly the conclusion to be drawn from the discussion on how the agreements were concluded and on what information was requested and provided. Considering the great variety of franchise agreements on the one hand and the numerous different options open to parties entering into franchise agreements on the other, as well as the fact that in international franchising questions such as the term of the master franchise agreement in relation to the development term could be approached in very many different ways and the resulting agreement still be a properly drafted agreement, it appeared that it would be almost impossible to treat such questions by means of an international convention, as the consequence would be to tie the hands of the parties by suggesting that the issue at hand ought to be dealt with in one specific way only, and this would be of little service to the business.

Furthermore, although nothing would prevent the elaboration of an international convention, a considerable number of mandatory provisions would be required for the regulation of the issues that might usefully be dealt with. The stringent nature of an international convention would moreover not permit adaptations that might be felt to be essential to ensure the adoption of the convention by a considerable number of States. The combination of the mandatory nature of the provisions and the binding nature of the convention would not augur well for the adoption of the convention by the different nations of the world. The utility of such an instrument might therefore seriously be questioned.

Considering the relative merits of the different types of instrument that were available, the Study Group came to the conclusion that a binding instrument such as an international convention would be inappropriate or even harmful to international franchising. However, there emerged in the course of the meeting of the Study Group a general consensus on the opportuneness, and indeed on the desirability, of preparing a legal guide to international franchising, and in particular to master franchise arrangements.

The reasons behind this consensus lay in the realisation that:

 there was a dearth of written material of true quality on the subject, with the consequence that all too often less experienced practitioners relied on information of dubious value, or on limited contractual experience that was inadequate to comprehend the special features and nuances of franchising;

 there was a tendency to seize upon an available franchise agreement as a model for use in any franchised relationship, without understanding the differences existing from one industry to another and in a wide range of other circumstances that may render the “model” inappropriate or even legally dangerous to use;

 inappropriate credibility might be given to operators claiming some experience in the field;

 in many developing countries there was an almost total lack of true understanding of franchising; and

 that in franchising, as in other commercial and legal arrangements, society benefited when counsel for both parties were well qualified to advice their clients. This was however unlikely to occur except in limited circumstances, and principally in highly developed societies.

As regards domestic franchising, the most obvious reason for the introduction of legislation is a desire to take care of problems that have arisen, to redress the balance between the parties to an agreement where the necessary balance either does not exist or has been distorted, and of course to make sure that sharp practices do not occur. In franchising, the most common ones include inadequate disclosure, omissions on the part of the franchisor as regards the assistance to be offered its franchisees or the sub-franchisor, inadequate training, too stringent provisions as regards the control exercised by the franchisor or as regards the rights of the franchisor to terminate the agreement, inadequate rights of the other party to terminate for breach on the part of the franchisor, and the structuring of the agreements in such a way that a legal vacuum is created and the weaker party ends up having no rights and perhaps losing its investment. It should of course not be forgotten that in franchising there is an effective need for franchisors to exercise a certain amount of control over their franchisees. The great difficulty is differentiating between the measures that effectively are necessary to, for example, protect the trademark and system, and those that instead go beyond that and end up becoming abusive. In many cases the border-line between what is permissible and what is not is very thin.

The conclusion arrived at by the Study Group was that the advisability of adopting an international convention in relation to domestic franchising was doubtful. A more feasible instrument might in this case be a model law.

At the end of the first session the Study Group decided to recommend to the Governing Council of UNIDROIT that a guide be prepared for international franchising, the emphasis of which should be master franchise arrangements, and that the question of the preparation of another instrument, possibly a model law, should be re-examined at a later date.3 This recommendation was endorsed by the UNIDROIT Governing Council in 1995. Work on the Guide began immediately and was brought to completion in 1998.

THE GUIDE TO INTERNATIONAL MASTER FRANCHISE ARRANGEMENTS

The ultimate purpose of the UNIDROIT Guide is to spread knowledge with a view to providing all those who deal with franchising, whether they be franchise operators, lawyers, judges, arbitrators or scholars, with a tool for the better understanding of the possibilities franchising, master franchising in particular, offers.

There is a wide-spread lack of knowledge of the exact nature of this way of doing business, as well as of the legal and practical issues that should be dealt with by any entrepreneur who is contemplating making use of the franchising vehicle. This lack of knowledge is common not only in the developing world, but also in industrialised nations in which franchising has been present for some time.

Although master franchising was selected as the main focus of the UNIDROIT Guide by reason of its being the method most commonly used in international franchising, a brief description of the other principal methods used in both domestic and international franchising is also provided. It is hoped that by offering an introduction to readers not familiar with this form of business, the Guide will be of use to operators, lawyers and others active on both the international and the domestic scenes. It must however be stressed that the principal purpose of the Guide is to assist parties in negotiating and drawing up international master franchise agreements by identifying the legal issues involved in those agreements, discussing possible approaches to the issues and, where appropriate, suggesting solutions which the parties may wish to consider. What the Guide sets out to achieve is uniformity in practice: by providing information, the Guide aims to assist in placing the parties on the same level where no previous knowledge or experience would otherwise have placed one of them at a disadvantage. It should therefore contribute to enabling the parties to deal with the issues that arise with greater confidence.

1 Adopted in Ottawa in 1988. See the pages of this site devoted to these instruments.

2 Commission Regulation (EEC) No 4087/88 of 30 November 1988 on the application of Article 85(3) of the Treaty to categories of franchise agreements (OJ EEC L 359/46 of 28 December 1988).

3 At its 77th session in February 1998 the Governing Council of the Institute endorsed the proposal to proceed with the preparation of a model law on franchising. See the pages of this site devoted to that instrument.